Mary Jo White, chairman of the U.S. Securities and Exchange Commission (SEC), speaks during a House Financial Services Committee hearing in Washington, D.C., U.S., on Tuesday, March 24, 2015.
Advertisement
The Securities and Exchange Commission voted Wednesday to formally adopt a rule, which will compel public companies to disclose the ratio between their chief executives’ annual compensation and median employee pay.
The new rule, required under the 2010 Dodd-Frank financial reform law, would require the nation’s 4,000 publicly traded companies to disclose the ratio of the annual total compensation of the CEO to the median of the annual total compensation of the company’s employees.
The requirement will kick in for 2017 fiscal year reporting.
For example, companies can use estimates or sampling to determine the median employee pay. So are emerging growth companies and investment companies. Economists who study incomes say that ever-expanding executive compensation packages have played a substantial role in increasing the divide between the wealthy and everyone else.”The system is pretty much out of control in many ways”, he said in an interview past year.
“This rule is more harmful than helpful, and we are disappointed that the SEC ignored suggestions for improvement”.
Democrat commissioner Kara Stein said in casting her vote in favor of the rule that ‘flexibility has been provided to companies in a thoughtful way and is carefully tailored to address implementation concerns, without undermining the intended benefits of the rule.’. Both Republicans on the panel – Daniel Gallagher and Michael Piwowar cited the influence of big U.S. labor unions as they voted against the rule.
It’s not just CEO salaries at the top-earning U.S. companies that have seen a sharp rise, but executive pay across the board, according to a report from the Economic Policy Institute that examined pay inequality over the past three decades.
Pay ratio “is a misleading, politically inspired, and costly disclosure that fails to provide investors with useful, comparable data”, Hirschman continued.
The SEC gave allowed for some discretion in determining the median pay of workers.
Something that is not widely appreciated about this subject is that across the entire American economy, while the ratio of CEO compensation to average worker compensation is staggeringly high, it’s also in decline over the medium term.
Once the new rule comes into force, millions of workers across the nation will learn how their pay compares with the pay of their top boss and this could potentially be very embarrassing since many corporates have kept their riches hidden for long.
Corporate America has been pushing back against the requirement, including the US Chamber of Commerce, which estimated it would cost US companies more than $700 million a year to gather the information.
“To steal a line from (Supreme Court) Justice (Antonin) Scalia, this is pure applesauce”, Gallagher said of the rule and its rationale.
After the SEC’s vote, business groups again voiced their disapproval for the rule, and some are expected to sue the agency over the rule’s approval.
Advertisement
Economists at the SEC believe a 5 per cent foreign worker exclusion would produce only a small impact from such an exclusion in an analysis released in June, which found such a carve-out changed a company’s pay ratio up or down by about 3.5 per cent.
